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Time to make fintech small

After Iceland had beaten England in the European Football Championship I was reminded of a Barclays TV-commercial from 2000 where Anthony Hopkins explains why ‘a big world needs a big bank’.

It’s a great commercial, and even though it’s 16 years old and we have had two serious global crises in since then, there is nothing out-dated about its message. On the contrary, since 2000 global GDP has almost doubled and the big banks have become even bigger. The four largest banks in America are now 150 per cent bigger than the next 50 banks combined, and in the UK the four biggest banks control 85 per cent of the market. This trend towards consolidating financial infrastructure is ubiquitous. New figures from Denmark, for instance, show that since 2008 the 10 biggest banks have gone from being 5 times to 9 times bigger than the rest. It’s been going on for a very long time.

But maybe being big isn’t as important in the future as we think, which the plucky footballers from tiny Iceland have reminded us about. Maybe the big dream of economies of scale is a relic of the 20th century. Look at Iceland, it has a population the size of a London borough, the country went bankrupt in 2009 but 7 years later it has paid its debt and regained full employment. The country did not need an EU for that. For Iceland, being small was the reason why they managed. Maybe we should look at fintech and banking from this new perspective.

Investments in fintech have grown tenfold over 5 years, and last year alone 20 billion dollars were invested in new fintech ventures that were supposed to disrupt and revolutionise the financial services industry. It hasn’t really happened, has it? The fintech revolution has made big banks bigger and small banks smaller, and new fintech startups have only won a few per cent of the total banking revenues. Market disruption seems a consumer generation away to me. Fintech is in the process of automating banking, but the winners are the big banks and the losers the small banks and their local communities.

From this perspective fintech has failed locally. Indeed, a new Scottish report, ‘Banking for Common Good’, states that continued consolidation of the banking industry is starving local communities. 1,500 local communities in the UK have no access to banking, and as the physical distance between banks and local communities increases, small and medium sized enterprises are desperately seeking funding to grow their businesses and stimulate local job creation.

The global economy, the technology companies and the mega banks have embraced fintech intelligently and are back in control after the financial crisis. Through their fintech funds, along with their incubators and accelerators, they are honing new talents and business models. Fintech has – with exceptions – become a cheap tool to make big systems even bigger.

This is the same philosophy the computer industry had in the 70s and 80s; thanks to technical innovation they were then able to build still more powerful mainframe computers and centralise data processing. Steve Jobs changed all that in 1984 with his Macintosh. He realised that new technology not only made it possible to create bigger IT-systems, it also made it possible to build them small and decentralise data processing away from mainframes; and while the rest of the world slept he proved his point once more in 2007 when he launched his iPhone, only this time decentralised computing came pocket-size.

In the last five years we have seen fintech used as a tool to succeed in a global economy. The potential of fintech is constantly measured in unicorns and billions, which is understandable if you are a big bank or a venture capitalist looking for the nearest exit. But for local communities it’s more important to have patient capital that will fund a new restaurant or a small bicycle shop.

Few fintech investors have taken the local community banking market seriously. The local banks certainly haven’t.  Where are the venture funds that specialise in local banking? I can’t find them. Where are the incubators that develop new financial community models? And where are the people from small financial institutions at fintech conferences? They are absent. On the fintech scene the agenda is set by the geeks and investors from Silicon Valley and Tech City, as well as the international banks.

It is about time we looked at fintech from a community perspective because new financial technologies such as crowdfunding, p2p lending, mobile payments, AI, advanced algorithms and blockchain technology will work just as well in a local environment as in a global. We have to make it a priority.

By Nils Elmark, Consulting Futurist, Bankinglab.London


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